UK jobs data surprises to the upside as prospect of further monetary stimulus in the UK diminishes

USD

The Congressional Budget Office has warned the U.S. economy will fall into recession if $600 billion of government spending cuts and tax increases take place at the start of 2013. Financial markets are complacent about whether the White House and Congress will reach agreement on deferring the so-called fiscal drag on the economy until later next year. Yesterday’s Building Permits data came out better than expected as did housing starts. The dollar index (an index of the dollar against a basket of its most commonly traded against currencies) rose slightly after a few days of decline and currently sits at 79.38.

EUR

The euro had a good day yesterday and held a near one month high against the dollar. This was due to a fall in Spanish bond yields, strong US housing data and hopes for year end rebound in China boosted optimism on the global economy.

Spanish bond yields were the lowest in seven months which could be good news to today’s bond sales in which they are hoping to raise 4.5 billion euros in the debt markets. A two day summit of euro zone leaders also starts today which should be watched closely. However, market expectations on any announcements on Spain are low as officials are expected to debate towards a single banking supervisor and proposals for closer eurozone integration.

Growth forecasts for Germany were cut yesterday for 2013. The original estimate of 1.6% growth has been downgraded to to 1% for next year. However, there are still fears amongst some analysts that this number is still too high.

GBP

Sterling rose to its highest in more than a week against the dollar on Wednesday after upbeat UK jobs data and Bank of England minutes threw doubt on the chances of more monetary easing next month. It had been widely expected that the BoE would introduce further monetary stimulus in November by expanding its Quantitative Easing programme. However, the minutes released yesterday showed the vote for October’s monetary stimulus decision was 9-0 against, and more significantly, that there were differences in opinion whether to introduce further stimulus.

Sterling remained close to an earlier four-month low against a broadly firmer euro after Moody’s affirmed Spain’s rating, easing widespread fears of a downgrade to ‘junk’ status.

Yesterday, solid UK jobs numbers added to signs that the economy may have staged a reasonable recovery in the third quarter after three consecutive quarters of contraction. The first estimate of third quarter gross domestic product is due next week. Unemployment fell unexpectedly from 8.1% to 7.9%, further continuing the recovery in the UK labour market. It will be interesting to see whether economic growth shows signs of mirroring this recovery.

SEK

Sweden’s krona strengthened against both the euro and dollar after Riksbank Governor Stefan Ingves wrote that there are risks in keeping interest rates low for a long time that “can’t be ignored” in an opinion piece in Svenska Dagbladet. The krona strengthened against the euro the dollar and also against all major currencies in a basket compiled by Bloomberg.